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Ghana’s oil resources toward economic growth and human development

Robert Osei / Mar 2012

As the country’s oil production shifts into gear, Ghana’s new status as a middle-income country is bound to see a reduction in official development assistance (ODA) in the medium to long term. This emerging oil industry will most likely provide a stimulus for increased net foreign direct investment (FDI) inflows into Ghana, particularly those targeted at prospecting and upstream activities. In the long term oil revenues can replace a country’s ODA. However for Ghana’s foreseeable future ODA needs to continue to be an important development tool—both in terms of being a source of finance, and as a tool for leveraging government policy.

But the prospect of oil revenues coming on-stream partnered with increased FDI inflows cannot be considered as protection from ‘Dutch disease’ problems. Nor do they guarantee a path of higher growth and sustained human development. These facts make it very important for Ghana to act pre-emptively to take advantage of both incoming ODA and oil revenues in the short to medium term to improve overall productivity in the country—particularly for the agricultural and manufacturing sectors—to avoid the ‘oil curse’.

Ghana has experienced positive economic growth and increasing human development over the last two decades. In tandem with this economic growth has been a fairly remarkable decrease in the incidence of poverty. However inequality and underemployment do stubbornly remain, and have even worsened in places. The positive growth is bringing about a changing structure of the economy in terms of the contribution of the different sectors to GDP, but the change cannot be said to be of the developmentally transformative type. Production within the economy still takes place at the lower end of the technology scale, and the country’s exports are still dominated largely by primary products. The fiscal imbalances and structural weaknesses that persist make any significant developmental transformation within the economy a challenge for policy makers.

There are two important ways that aid can be used to help Ghana transform its economy vis-à-vis the early oil production phase. First, it is important that aid is used to help solve the inherent structural deficiency in government fiscal management. Here aid can be used both directly and/or indirectly (by leveraging policies) towards resolving the perennial deficits which constrain macroeconomic management. A second way that ODA can help is to be used to channel resources to priority sectors. The idea here is to use aid and other resources (including those from oil) to steer private investments towards well-defined sectors in the economy. Such strategic use of aid can help steer the economy away from a potential ‘resource curse’ path—a path which has blighted other countries.